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Insurance industry gets new framework for GHG accounting

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The Partnership for Carbon Accounting Financials (PCAF) has launched a public consultation on the Global GHG Accounting and Reporting Standard for the Insurance Industry Progress Report. The consultation will be open until 26 August 2022.

Financial carbon accounting assigns a market value to quantifying emissions and sits alongside physical accounting measures like the GHG Protocol for Scope 1, 2 and 3 emissions. The goal is that by quantifying the market value of emissions, it can clarify not only the exposure that insurers have to emissions related risk but hopefully encourage them to manage down such risks in their portfolios.

Climate risk is a major problem for insurers and reinsurers

Climate risk, currently equated in performance terms to emissions, is a huge issue for the insurance industry. There are potential impacts from extreme weather which can have cascade effects, and there are gaps in existing protections. As climate change impacts worsen, so will the performance of the insurance industry.

Insurers sit in a unique position as they have exposure to both asset risk as well as underwriting risk, particularly in terms of property and causality in terms of potential liabilities.

Given the increasing demand by the insurance industry and other stakeholders for tools to measure and report greenhouse gas (GHG) emissions, there is a need to develop a set of global, standardized methodologies for measuring and disclosing the GHG emissions associated with insurance and reinsurance underwriting portfolios for accounting purposes.

New topics for consultation under the new Standard

Following the consultation on the Insurance-Associated Emissions Scoping Document in March 2022, the PCAF Insurance-Associated Emissions Working Group has worked intensively to finalize the Progress Report on Reporting Insurance-Associated Emissions.

The Global GHG Accounting and Reporting Standard for the Insurance Industry Progress Report will cover topics including:

  • Attribution factor proposals for commercial lines insurance
  • Attribution factor proposals for personal motor lines
  • Insurance-associated emissions data and data quality
  • Reporting methodology, requirements, recommendations, and metrics

In the document stakeholders can find a discussion on the differences between insurance-associated emissions and financed emissions; and a presentation of the scope and principles of the GHG accounting of insurance-associated emissions.

Standardised methodologies needed for accounting in underwriting

As well as an exploration of possible approaches for the attribution methodology to calculate absolute emissions associated with insurance underwriting portfolios.

PCAF has highlighted the increasing demand by the insurance industry and other stakeholders for tools to measure and report (GHG) emissions and in a statement said: “There is a need to develop a set of global, standardised methodologies for measuring and disclosing the GHG emissions associated with insurance and reinsurance underwriting portfolios for accounting purposes.”

The harmonized accounting approach provides financial institutions with the starting point required to set science-based targets and align their portfolio with the Paris Climate Agreement. PCAF enables transparency and accountability and has developed an open-source global GHG accounting standard for financial institutions, the Global GHG Accounting and Reporting Standard for the Financial Industry.

Insurers are joining the wider transformation of financial services

Banks represent most of the available capital globally and since the Paris Climate Agreement the largest banks have still invested more than $3.8 trillion into the fossil fuel sector. This is equivalent to $2 billion for every day since the end of 2015, with no downward trend and no assessment of the carbon impact of that finance.

In 2021 France’s central bank released the first results of its climate stress tests, with findings that  natural disaster-related insurance claims could increase up to five-fold in the nation’s most affected regions. That would cause premiums to surge as much as 200% over 30 years. The Bank of England’s 2022 stress test found that insurers and banks could faces losses of over £300 billion over the coming years.

Climate risk is critical to the insurance industry because of the potential impacts and existing protection gaps. The costs of natural catastrophes increase every year, with claims measured in the hundreds of billions of dollars. At the same time, few projects can be implemented without relevant insurance, so the new swathe of fossil fuel development projects could not and would not happen without insurance.

Building on the GHG accounting activities in the Netherlands and North America, ABN AMRO, Amalgamated Bank ASN Bank, Global Alliance for Banking on Values (GABV) and Triodos Bank decided in 2015 to launch a global initiative.

The goal was to develop a global GHG accounting standard and increase the number of financial institutions applying this standard to over 250 institutions globally (with over $77 trillion in total assets), and ultimately to make GHG accounting common practice within the financial industry. Expanding its approach to the insurance industry is the next iteration of that process.

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